International Trade Chapter 34 CHAPTER IN PERSPECTIVE In Chapter 34 we see that all countries can benefit from free trade but, despite this fact, countries nevertheless restrict trade. Describe the patterns and trends in international trade. The goods and services that we buy from people in other countries are called imports. The goods and services that we sell to people in other countries are called exports. Goods comprise 72 percent of U.S. exports and 84 percent of U.S. imports. The rest of U.S. international trade is in services. Trade has grown over time. Between 1960 and 2002 exports grew from 5 percent of total output to 10 percent, and imports grew from 4 percent to 14 percent. The biggest U.S. trading partner is Canada, followed by Mexico, Japan, and China. The balance of trade is the value of exports minus the value of imports. In 2002, the United States had a trade deficit. Explain why nations engage in international trade and why trade benefits all nations. Comparative advantage enables countries to gain from trade. A nation has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than another country. To achieve the gains from trade, a nation specializes in the production of the goods and services in which it has a comparative advantage and then trades with other nations. By specializing and trading, a nation can consume at a point beyond its production possibilities frontier. Repeatedly performing the same task and becoming more productive at producing a particular good or service is called learningby-doing. Learning-by-doing can lead to dynamic comparative advantage. Explain how trade barriers reduce international trade. A tariff is a tax on a good that is imposed by the importing country when an imported good crosses its international boundary. A tariff on a good reduces imports of that good, increases domestic production of the good, and reduces the gains from trade. A quota is a specified maximum amount of a good that may be imported in a given period of time. Explain the arguments used to justify trade barriers and show why they are incorrect but also why some barriers are hard to remove. The three main arguments for protection and restriction of trade are the national security argument, the infant-industry argument, and the dumping argument. Each of these arguments is flawed. Fatally flawed arguments for protection are that protection saves jobs, allows us to compete with cheap foreign labor, brings diversity and stability, penalizes lax environmental standards, protects national culture, and prevents rich countries from exploiting developing countries. Tariffs are imposed in some nations to gain revenue for the government. Trade is restricted is because of rent seeking.
510 Part 11. THE GLOBAL ECONOMY EXPANDED CHAPTER CHECKLIST When you have completed this chapter, you will be able to: 1 Describe the patterns and trends in international trade. Discuss U.S. international trade in goods and services and describe the trends in the volume of trade. Discuss the United States major trading partners and the trading blocs in which the United States is a member. Define balance of trade. 2 Explain why nations engage in international trade and why trade benefits all nations. Discuss the relationship between comparative advantage and opportunity cost. Explain how the production possibilities frontier can be used to determine the opportunity cost of producing a good. Use the production possibilities frontier to demonstrate the gains from trade. 3 Explain how trade barriers reduce international trade. Define tariff and quota. Explain the effects of a tariff and a quota on domestic consumers, domestic producers, and the domestic government. 4 Explain the arguments used to justify trade barriers and show why they are incorrect but also why some barriers are hard to remove. Discuss the three main arguments for protection and explain why each argument is invalid. Discuss the six fatally flawed arguments (saving jobs, competing with cheap foreign labor, bringing diversity and stability, penalizing lax environmental standards, protecting national culture, and preventing exploitation) for protection. Explain why governments and rent seekers are in favor of protection. KEY TERMS Balance of trade (page 859) Learning-by-doing (page 866) Dynamic comparative advantage (page 866) Tariff (page 868) Nontariff barrier (page 868) Quota (page 870) Infant-industry argument (page 873) Dumping (page 874) CHECKPOINT 34.1 Describe the patterns and trends in international trade. Practice Problem 34.1 Use the link on your Foundations Web site to answer the following questions: a. In 1990, what percentage of Canadian production was exported to the United States and what percentage of total goods and services bought by Canadians was imported from the United States? b. In 2000, what percentage of Canadian production was exported to the United States and what percentage of total goods and services bought by Canadians was imported from the United States? Solution to Practice Problem 34.1 Although trade is not a major part of the U.S. economy, this Practice Problem illustrates how important trade with just the United States is to Canada. Quick Review Imports The goods and services that we buy from people in other countries are called imports.
Chapter 34. International Trade 511 Exports The goods and services that we sell to people in other countries are called exports. a. In 1990, what percentage of Canadian production was exported to the United States and what percentage of total goods and services bought by Canadians was imported from the United States? In 1990, Canadian exports to the United States were 16.5 percent of Canadian production. Canadian imports from the United States were 14.4 percent of the total goods and services bought by Canadians. b. In 2000, what percentage of Canadian production was exported to the United States and what percentage of total goods and services bought by Canadians was imported from the United States? In 2000, Canadian exports to the United States were 34.6 percent of Canadian production. Canadian imports from the United States were 27 percent of the total goods and services bought by Canadians. Additional Practice Problem 34.1a Citibank, an American firm, provides financial services to firms in France. Describe how the United States and France categorize these financial services. Solution to Additional Practice Problem 34.1a For the United States, the services rendered by Citibank are exports to France. For France, the services rendered by Citibank are imports from the United States. Self Test 34.1 Fill in the blanks Manufactured goods account for (8; 28; 58) percent of U.S. imports. (Canada; Mexico; The United Kingdom; Japan) is the United States biggest trading partner. The United States (is; is not) a member of NAFTA, the North American Free Trade Agreement. In the United States between 1960 and 2002, trade (decreased; increased) as a fraction of total output. True or false 1. The United States exports more services than goods. 2. In 2002, 1 percent of total U.S. output was exported. 3. Canada, Mexico, and Japan are the biggest U.S. trading partners. 4. In 2002, the United States imported a larger value of goods and services than it exported. Multiple choice 1. Goods and services that we buy from people in other countries are called a. imports. b. exports. c. inputs. d. raw materials. 2. The largest fraction of U.S. imports is and the largest fraction of U.S. exports. a. industrial materials; industrial materials b. industrial materials; manufactured goods c. manufactured goods; industrial materials d. manufactured goods; manufactured goods 3. Goods account for about percent of U.S. exports and services account for about percent of U.S. exports. a. 51; 49 b. 72; 28 c. 28; 72 d. 100; 0 4. If a college student from North Carolina State University travels to Germany, the money spent on hotels and sight seeing in Germany is counted as services a. exported to America. b. imported to Germany. c. exported to Germany. d. exported from America.
512 Part 11. THE GLOBAL ECONOMY 5. The largest U.S. trading partner is a. Canada. b. Mexico. c. Japan. d. the European Union. 6. The balance of trade equals a. the value of imports minus the value of exports. b. the value of exports minus the value of imports. c. the value of imports. d. the value of exports. Short answer and numeric questions 1. French cheese is flown to the United States abroad a United Airlines plane. Classify these transactions from the vantage point of the United States and from the vantage point of France. 2. How has the amount of international trade changed in the United States between 1960 and 2002? 3. What is NAFTA and what is its goal? CHECKPOINT 34.2 Explain why nations engage in international trade and why trade benefits all nations. Practice Problem 34.2 During most of the Cold War, the United States and Russia did not trade with each other. The United States produced manufactured goods and farm produce. Russia produced manufactured goods and farm produce. Suppose that in the last year of the Cold War, the United States could produce 100 million units of manufactured goods or 50 million units of farm produce and Russia could produce 30 million units of manufactured goods or 10 million units of farm produce. a. What was the opportunity cost of 1 unit of farm produce in the United States? b. What was the opportunity cost of 1 unit of farm produce in Russia? c. Which country had a comparative advantage in producing farm produce? d. With the end of the Cold War and the opening up of trade between Russia and the United States, which good did the United States import from Russia? e. Did the United States gain from this trade? Explain why or why not. f. Did Russia gain from this trade? Explain why or why not. Solution to Practice Problem 34.2 This Practice Problem shows that when opportunity costs between countries diverge, comparative advantage enables countries to gain from international trade. Quick Review Comparative advantage A nation has a comparative advantage in a good when its opportunity cost of producing the good is lower than another nation s opportunity cost of producing the good. a. What was the opportunity cost of 1 unit of farm produce in the United States? In the United States, to produce 50 million units of farm produce, 100 million units of manufactured goods are forgone. So the opportunity cost of 1 unit of farm produce is (100 million units of manufactured goods) (50 million units of farm produce), which is 2 units of manufactured goods. b. What was the opportunity cost of 1 unit of farm produce in Russia? In Russia, to produce 10 million units of farm produce, 30 million units of manufactured goods are forgone. The opportunity cost of 1 unit of farm produce is (30 million units of manufactured goods) (10 million units of farm produce), which is 3 units of manufactured goods. c. Which country had a comparative advantage in producing farm produce? The opportunity cost of producing farm produce was less in the United States than in Russia, so the United States had the comparative advantage in farm produce.
Chapter 34. International Trade 513 d. With the end of the Cold War and the opening up of trade between Russia and the United States, which good did the United States import from Russia? Russia had the comparative advantage in producing manufactured goods. The opportunity cost of producing 1 unit of a manufactured good in Russia was 1/3 of a unit of farm produce. The opportunity cost of producing 1 unit of manufactured good in the United States was 1/2 of a unit of farm produce. So the United States imported manufactured goods from Russia. e. Did the United States gain from this trade? Explain why or why not. The United States gained from this trade because it ended up with more of both goods. f. Did Russia gain from this trade? Explain why or why not. Russia also gained from this trade for the same reason that the United States gained: Russia ended up with more of both goods. When countries specialize in the good in which they have a comparative advantage and then trade, both countries gain. Additional Practice Problem 34.2a In Practice Problem 34.2, suppose that new technology becomes available so that the production of manufactured goods doubles in the United States and Russia. Now which good does the United States import from Russia? Solution to Additional Practice Problem 34.2a In the United States when 200 million units of manufactured goods are produced, 50 million units of farm produce are forgone. The opportunity cost of 1 unit of manufactured goods is (50 million units of farm produce) (200 million units of manufactured goods), which is 1/4 unit of farm produce. In Russia when 60 million units of manufactured goods are produced, 10 million units of farm produce are forgone. The opportunity cost of 1 unit of manufactured goods is (10 million units of farm produce) (60 million units of manufactured goods), which is 1/6 unit of farm produce. Russia still has the comparative advantage in manufactured goods. So the United States continues to import manufactured goods from Russia. Self Test 34.2 Fill in the blanks A country has a comparative advantage in producing a good if it can produce the good at (higher; lower) opportunity cost than another country. If the world price of clothing is less than the price in the United States with no international trade and the United States imports clothing from Asia, U.S. buyers of clothing (gain; lose) and Asian producers of clothing (gain; lose). Trade (allows; does not allow) a nation to produce at a point beyond its production possibilities frontier. Trade (allows; does not allow) a nation to consume at a point beyond its production possibilities frontier. True or false 1. Only the exporting country gains from free international trade because it has a comparative advantage. 2. The United States has a comparative advantage in the production of a good if the opportunity cost of producing that good is higher in the United States than in most other countries. 3. A country cannot reap any gains from international trade if it has an absolute advantage in producing all goods and services. 4. In World War II, U.S. shipbuilders became more productive by repeatedly producing the same type of boat, a phenomenon called learning-by-doing. Multiple choice 1. The fundamental force that drives trade between nations is a. the government. b. NAFTA. c. absolute advantage. d. comparative advantage.
514 Part 11. THE GLOBAL ECONOMY 2. A nation will import a good if its a. no-trade, domestic price is equal to the world price. b. no-trade, domestic price is less than the world price. c. no-trade, domestic price is greater than the world price. d. All of the above answers are correct. 3. When Italy buys Boeing jets, the price Italy pays is than if they produced their own jets and the price Boeing receives is than it could receive from an additional U.S. buyer. a. lower; lower b. higher; higher c. lower; higher d. higher; lower 4. When a good is imported, the domestic production and the domestic consumption. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases 5. You can tell that specialization and trade make a country better off because then the country can consume at a point a. outside its production possibilities frontier. b. inside its production possibilities frontier. c. on its production possibilities frontier. d. on the trading partner s production possibilities frontier. 6. People can become more productive just by repeatedly producing a particular good or service. This is called a. learning-by-doing. b. learning-by-boredom. c. absolute advantage. d. dynamic absolute advantage. Complete the graph 1. Figure 34.1 shows the U.S. demand and supply curves for wheat. FIGURE 34.1 Price (dollars per bushel) 10 8 6 4 2 0 2 4 6 8 10 Quantity (millions of bushels per year) a. In the absence of international trade, what is the price of a bushel of wheat in the United States? b. If the world price of a bushel of wheat is $6 a bushel, will the United States import or export wheat? Above what world price for wheat will the United States export wheat? Below what world price for wheat will the United States import wheat? 2. Figure 34.2 has the U.S. and French PPFs. FIGURE 34.2 Computer chips (thousands per year) 500 400 300 200 100 0 U.S. PPF 200 400 600 800 1,000 Cheese (thousands of pounds per year) D French PPF a. What is the opportunity cost of a computer chip in the United States? In France? S
Chapter 34. International Trade 515 Who has the comparative advantage in producing computer chips? b. What is the opportunity cost of a pound of cheese in the United States? In France? Who has the comparative advantage in producing cheese? c. When the United States and France trade, who exports chips and who exports cheese? d. The United States produced 200,000 computer chips and 200,000 pounds of cheese before trade. France produced 100,000 computer chips and 400,000 pounds of cheese. Label as point A the point that shows the total chip and cheese production before trade. e. The United States and France both specialize according to comparative advantage after trade. Label as point B the point that shows the total chip and cheese production after trade. How does point B compare to point A? Short answer and numeric questions 1. The table has the U.S. demand and supply schedules for potatoes. Price (dollars per ton) Quantity supplied (tons per year) Quantity demanded (tons per year) 400 38 58 500 42 52 600 46 46 700 50 40 800 54 34 900 58 28 a. If there is no international trade, what is the equilibrium price and quantity? b. If the world price of potatoes is $800 a ton, what is the quantity supplied and the quantity demanded in the United States? Does the United States import or export potatoes? What quantity? c. If the world price of potatoes rises to $900 a ton, what is the quantity supplied and the quantity demanded in the United States? Does the United States import or export potatoes? What quantity? d. Would the United States ever import potatoes? 2. Suppose the United States and France produce only ice cream and cheese. The United States can produce 50 tons of ice cream or 100 tons of cheese and France can produce 20 tons of ice cream or 120 tons of cheese. a. What is the opportunity cost of a ton of ice cream in France? In the United States? Which nation has the comparative advantage in producing ice cream? b. What is the opportunity cost of a ton of cheese in France? In the United States? Which nation has the comparative advantage in producing cheese? c. If France and the United States trade, what does the United States import? What does it export? d. Before trade the United States produced 25 tons of ice cream and 50 tons of cheese and France produced 10 tons of ice cream and 60 tons of cheese. What is the total production of ice cream? Of cheese? e. After trade, France and the United States specialize according to comparative advantage. What is the total amount of ice cream produced? Of cheese? f. Compare your answers to (d) and (e). 3. What are the gains from trade? How do countries obtain the gains from trade? 4. What is dynamic comparative advantage? CHECKPOINT 34.3 Explain how trade barriers reduce international trade. Practice Problems 34.3 1. Before 1995, the United States imposed tariffs on goods imported from Mexico and Mexico imposed tariffs on goods imported from the United States. In 1995, Mexico joined NAFTA. U.S. tariffs on imports from Mexico and Mexican tariffs on imports from the United States
516 Part 11. THE GLOBAL ECONOMY are gradually being removed. Explain how the removal of tariffs will change: a. The price that U.S. consumers pay for goods imported from Mexico. b. The quantity of U.S. imports from Mexico. c. The quantity of U.S. exports to Mexico. d. The U.S. government s tariff revenue from trade with Mexico. 2. In 2000, the U.S. government placed a ban on potato imports from Canada. Explain how the ban influences: a. The price that U.S. consumers pay for potatoes. b. The quantity of potatoes consumed in the United States. c. The price received by Canadian potato growers. d. The U.S. and Canadian gains from trade. Solution to Practice Problems 34.3 Think in terms of the supply and demand model. Imposing a tariff or a quota raises the domestic price, which changes the quantity demanded and the quantity supplied. Quick Review Tariff A tariff is a tax on a good that is imposed by the importing country when an imported good crosses its international boundary. Quota A quota is a specified maximum amount of a good that may be imported in a given period of time. 1a. The price that U.S. consumers pay for goods imported from Mexico. When the tariff is removed U.S. consumers pay less for goods imported from Mexico. 1b. The quantity of U.S. imports from Mexico. As the price falls, the quantity of Mexican goods demanded by U.S. consumers increases, so the quantity of U.S. imports from Mexico increases. 1c. The quantity of U.S. exports to Mexico. When the tariff is removed Mexican consumers pay less for goods exported from the United States. So the quantity of U.S. goods demanded by Mexican consumers increases and the quantity of U.S. exports to Mexico increases. 1d. The U.S. government s tariff revenue from trade with Mexico. When the tariff reaches zero, so that trade is totally free of tariffs, the U.S. government s tariff revenue is zero. 2. In 2000, the U.S. government placed a ban on potato imports from Canada. Explain how the ban influences: 2a. The price that U.S. consumers pay for potatoes. The ban decreases the supply of imported potatoes and raises the price paid by U.S. consumers. 2b. The quantity of potatoes consumed in the United States. As the price of potatoes rises, the quantity of potatoes consumed in the United States falls. 2c. The price received by Canadian potato growers. Because Canadian producers cannot export their potatoes to the United States, the supply of potatoes in Canada increases and the price of potatoes falls. 2d. The U.S. and Canadian gains from trade. The U.S. and Canadian gains from trade are decreased. Anything that limits international trade decreases the gains from trade. Additional Practice Problem 34.3a For many years Japan conducted extremely slow, detailed, and costly safety inspections of all U.S. cars imported into Japan. In terms of trade, what was the effect of this inspection? How did the inspection affect the price and quantity of cars in Japan? Solution to Additional Practice Problem 34.3a Japan s safety inspection (which has since been eliminated) was an example of a nontariff barrier to trade. It served a role similar to tariffs and quotas. The safety inspection added to the cost of selling cars in Japan. It raised the price of U.S. produced cars in Japan and decreased the quantity of U.S. cars sold. The Japanese government, however, received no tariff revenue.
Chapter 34. International Trade 517 Self Test 34.3 Fill in the blanks A tax on a good that is imposed by the importing country when an imported good crosses its international boundary is a (quota; tariff) and a specified maximum amount of a good that may be imported in a given period of time is a (quota; tariff). A tariff (raises; lowers) the price paid by domestic consumers and (increases; decreases) the quantity produced by domestic producers. A quota (raises; lowers) the price paid by domestic consumers and (increases; decreases) the quantity produced by domestic producers. True or false 1. If the United States imposes a tariff, the price paid by U.S. consumers does not change. 2. If a country imposes a tariff on rice imports, domestic production of rice will increase and domestic consumption of rice will decrease. 3. A tariff increases the gains from trade for the exporting country. 4. A quota on imports of a particular good specifies the minimum quantity of that good that can be imported in a given period. Multiple choice 1. A tax on a good that is imposed by the importing country when an imported good crosses its international boundary is a a. quota. b. nontariff barrier. c. tariff. d. sanction. 2. The average U.S. tariff was highest in the a. 1930s. b. 1940s. c. 1970s. d. 1980s. 3. Suppose the world price of a shirt is $10. If the United States imposes a tariff of $5 a shirt, then the price of a shirt in the a. United States falls to $5. b. United States rises to $15. c. world falls to $5. d. world rises to $5. 4. When a tariff is imposed on a good, the increases. a. domestic quantity purchased b. domestic quantity produced c. quantity imported d. quantity exported 5. When a tariff is imposed on a good, domestic consumers and domestic producers. a. win; lose b. lose; win c. win; win d. lose; lose 6. Which of the following parties benefits from a quota but not from a tariff? a. the government b. domestic producers c. domestic consumers d. the person with the right to import the good Complete the graph 1. Figure 34.3 shows the supply of and demand for sugar in the United States. FIGURE 34.3 Price (cents per pound) S 25 20 15 10 5 0 10 20 30 40 50 Quantity (millions of pounds per month) a. If the world price of sugar is 10 a pound, draw the world price line in the figure. What is the quantity consumed in the United States, the quantity produced in the United States, and the quantity imported? D
518 Part 11. THE GLOBAL ECONOMY b. Suppose the government imposes a 5 a pound tariff on sugar. Show the effect of the tariff in Figure 19.3 After the tariff, what is the quantity consumed in the United States, the quantity produced in the United States, and the quantity imported? Short answer and numeric questions 1. Suppose the U.S. government imposes a tariff on steel. How does the tariff affect the price of steel? How does it affect U.S. steel consumers? U.S. steel producers? 2. Suppose the U.S. government imposes a quota on steel. How does the quota affect the price of steel? How does it affect U.S. steel consumers? U.S. steel producers? 3. Why do consumers lose from a tariff? CHECKPOINT 34.4 Explain the arguments used to justify trade barriers and show why they are incorrect but also why some barriers are hard to remove. Practice Problems 34.4 1. Japan sets quotas on imports of rice. California rice growers would like to export more rice to Japan. What are Japan s arguments for restricting imports of Californian rice? Are these arguments correct? Who loses from this restriction of trade? 2. The United States has, from time to time, limited imports of steel from Europe. What is the argument that the United States has used to justify this quota? Who wins from this restriction? Who loses? 3. The United States maintains a quota on imports of textiles. What is the argument for this quota? Is this argument flawed? If so, explain why. Solution to Practice Problem 34.4 Free trade promotes prosperity for all countries. Protection reduces the potential gains from trade. These Practice Problems discuss the arguments for protection and show the range of issues in the free trade versus protection debate. Quick Review Rent seeking Lobbying and other political activity that seeks to capture the gains from trade. 1. Japan sets quotas on imports of rice. California rice growers would like to export more rice to Japan. What are Japan s arguments for restricting imports of Californian rice? Are these arguments correct? Who loses from this restriction of trade? Japan has used a number of arguments, but they are all incorrect. Japan has argued that Japanese rice is of a higher quality than U.S. rice, but if Japanese consumers detect a quality difference, they can purchase Japanese rice rather than U.S. rice. Japan has argued that rice is part of Japanese national heritage, but if Japanese consumers want to protect this part of their heritage, they can buy exclusively Japanese rice rather than U.S. rice. The major losers from the Japanese quota are Japanese consumers who must pay a higher price for rice. 2. The United States has, from time to time, limited imports of steel from Europe. What is the argument that the United States has used to justify this quota? Who wins from this restriction? Who loses? In past decades, the United States asserted that the steel industry was needed because it played a major role in national defense. With the use of more exotic materials in defense armaments, the national defense argument has passed into history. More recently, the United States has, at times, argued that Europeans were dumping steel in the United States. Both of these arguments are likely not the true reason for the quotas. The quotas are the result of political lobbying by steel producers and steel workers. They are the result of rent seeking by steel producers and steel workers. The winners from the quotas are the steel producers and steel workers. The losers are all U.S. steel consumers. 3. The United States maintains a quota on imports of textiles. What is the argument for
Chapter 34. International Trade 519 this quota? Is this argument flawed? If so, explain why. U.S. textile producers and textile workers assert that the U.S. textile industry needs protection because of cheap foreign labor. This argument is flawed. The United States does not have a comparative advantage in textiles because textiles can be produced by low-productivity, lowwage workers. U.S. workers have a higher productivity and command a higher wage. Other nations have a comparative advantage in producing textiles. Additional Practice Problem 34.4a In each of the three Practice Problems, identify who is rent seeking. Solution to Additional Practice Problem 34.4a Rent seeking is lobbying and other political activity that seeks to capture the gains from trade. In Practice Problem 1, the Japanese rice farmers are rent seeking. In Practice Problem 2, the U.S. steel producers and U.S. steel workers are rent seeking. And in Practice Problem 3, U.S. textile producers and U.S. textile workers are rent seeking. Self Test 34.4 Fill in the blanks The assertion that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets is the (infant-industry; maturing-industry) argument. Dumping occurs when (U.S. jobs are lost to cheap foreign labor; a foreign firm sells its exports at a lower price than its cost of production). Protection (is; is not) necessary to bring diversity and stability to our economy. Protection (is; is not) necessary to prevent rich countries from exploiting developing countries. The major reason why international trade is restricted is because (foreign countries protect their industries; of rent seeking). True or false 1. The national security argument is the only valid argument for protection. 2. Dumping by a foreign producer is easy to detect. 3. Protection saves U.S. jobs at no cost. 4. International trade is an attractive base for tax collection in developing countries Multiple choice 1. The national security argument is used by those who assert they want to a. increase imports as a way of strengthening their country. b. increase exports as a way of earning money to strengthen their country. c. limit imports that compete with domestic producers important for national defense. d. limit exports to control the flow of technology to third world nations. 2. The argument that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets is the a. national security argument. b. diversity argument. c. infant-industry argument. d. environmental protection argument. 3. occurs when a foreign firm sells its exports at a lower price than its cost of production. a. Dumping b. The trickle-down effect c. Rent seeking d. Tariff avoidance 4. The United States a. needs tariffs to allow us to compete with cheap foreign labor. b. does not need tariffs to allow us to compete with cheap foreign labor. d. should not trade with countries that have cheap labor. d. will not benefit from trade with countries that have cheap labor.
520 Part 11. THE GLOBAL ECONOMY 5. Why do governments in less-developed nations impose tariffs on imported goods and services? a. The government gains revenue from the tariff. b. The government s low-paid workers are protected from high-paid foreign workers. c. The nation s total income is increased. d. The country s national security is improved. Short answer and numeric questions 1. What is the dumping argument for protection? What is its flaw? 2. How do you respond to a speaker who says that we need to limit auto imports from Japan in order to save U.S. jobs? 3. Why is it incorrect to assert that trade with developing countries exploits the workers in these countries? 6. What is the major reason international trade is restricted? a. rent seeking b. to allow competition with cheap foreign labor c. to save jobs d. to prevent dumping
Chapter 34. International Trade 521 SELF TEST ANSWERS CHECKPOINT 34.1 Fill in the blanks Manufactured goods account for 58 percent of U.S. imports. Canada is the United States biggest trading partner. The United States is a member of NAFTA, the North American Free Trade Agreement. In the United States between 1960 and 2002, trade increased as a fraction of total output. True or false 1. False; page 856 2. False; page 856 3. True; page 857 4. True; page 859 Multiple choice 1. a; page 856 2. d; page 856 3. b; page 856 4. a; page 856 5. a; page 857 6. b; page 859 Short answer and numeric questions 1. From the U.S. vantage, the cheese is an imported good and the air transportation is an exported service. From the French vantage, the cheese is an exported good and the air transportation is an imported service; page 856. 2. Between 1960 and 2002, international trade in the United States expanded. In 1960, U.S. exports were 5 percent of total output and in 2002, exports were 10 percent of total output. In 1960, U.S. imports were 4 percent of the goods and services purchased and in 2002, imports were 14 percent of the goods and services purchased; page 856. 3. NAFTA is the North American Free Trade Agreement. It is an agreement among Canada, the United States, and Mexico to make trade among the three nations easier and freer; page 857. CHECKPOINT 34.2 Fill in the blanks A country has a comparative advantage in producing a good if it can produce the good at lower opportunity cost than another country. If the world price of clothing is less than the price in the United States with no international trade and the United States imports clothing from Asia, U.S. buyers of clothing gain and Asian producers of clothing gain. Trade does not allow a nation to produce at a point beyond its production possibilities frontier. Trade allows a nation to consume at a point beyond its production possibilities frontier. True or false 1. False; page 866 2. False; pages 860-861 3. False; page 866 4. True; page 866 Multiple choice 1. d; page 860 2. c; pages 861-820 3. c; page 820 4. c; page 863 5. a; page 866 6. a; page 866 Complete the graph 1. a. In the absence of international trade, the equilibrium price of a bushel of wheat in the United States is $4; pages 860-861. b. If the world price of a bushel of wheat is $6 a bushel, the United States will export wheat because the world price exceeds the no-trade price. If the price of wheat exceeds $4 a bushel, the United States will export wheat. If the price of wheat is less than $4 a bushel, the United States will import wheat; pages 862-863. 2. a. The opportunity cost of a computer chip in the United States is 1 pound of cheese. In France, the opportunity cost of a com-
522 Part 11. THE GLOBAL ECONOMY puter chip is 4 pounds of cheese. The United States has the comparative advantage in chips; page 863. b. The opportunity cost of a pound of cheese in the United States is 1 computer chip. In France, the opportunity cost is of a pound of cheese 1/4 of a computer chip. France has the comparative advantage in cheese; page 863. c. The United States has the comparative advantage in chips, so it will specialize in producing chips and export chips to France. France will specialize in cheese and export cheese to the United States; page 865. d. The point is labeled in Figure 34.4; page 865-866. FIGURE 34.4 Computer chips (thousands per year) 500 400 300 200 100 0 U.S. PPF A French PPF 200 400 600 800 1,000 Cheese (thousands of pounds per year) e. The United States produces 400,000 chips and no cheese and France produces 800,000 pounds of cheese and no chips. The total production is 400,000 chips and 800,000 pounds of cheese, labeled as point B in Figure 34.4. More chips and more cheese are produced at point B after trade than are produced at point A before trade; page 866. Short answer and numeric questions 1. a. In the absence of international trade, the equilibrium price is $600 a ton and the equilibrium quantity is 46 tons; page 860. B b. In the United States, the quantity supplied is 54 tons and the quantity demanded is 34 tons. The United States exports 20 tons of potatoes; page 861. c. In the United States, the quantity supplied is 58 tons and the quantity demanded is 28 tons. The United States exports 30 tons of potatoes; page 861. d. The United States would import potatoes if the world price is less than $600 a ton; page 863. 2. a. In France, the opportunity cost of a ton of ice cream is 6 tons of cheese; in the United States, the opportunity cost of a ton of ice cream is 2 tons of cheese. The United States has the comparative advantage in producing ice cream; page 866. b. In France, the opportunity cost of a ton of cheese is 1/6 of a ton of ice cream; in the United States, the opportunity cost of a ton of cheese is 1/2 of a ton of ice cream. France has the comparative advantage in producing cheese; page 866. c. The United States imports cheese and exports ice cream; page 866. d. 35 tons of ice cream are produced and 110 tons of cheese are produced; page 866. e. 50 tons of ice cream are produced in the United States and 120 tons of cheese are produced in France; page 866. f. The world production of ice cream and cheese increased, which demonstrates the gains from trade; page 866. 3. The gains from trade occur because after specialization and trade, a country can increase its consumption so that it can consume at a point beyond its production possibilities frontier. To obtain the gains from trade a country must specialize and trade; pages 865-866. 4. Dynamic comparative advantage is comparative advantage from specializing in an activity so that productivity increases because of learning-by-doing; page 866.
Chapter 34. International Trade 523 CHECKPOINT 34.3 Fill in the blanks A tax on a good that is imposed by the importing country when an imported good enters its boundary is called a tariff and a specified maximum amount of a good that may be imported is called a quota. A tariff raises the price paid by domestic consumers and increases the quantity produced by domestic producers. A quota raises the price paid by domestic consumers and increases the quantity produced by domestic producers. True or false 1. False; pages 869-870 2. True; pages 869-870 3. False; pages 869-870 4. False; page 870 Multiple choice 1. c; page 868 2. a; page 868 3. b; page 869 4. b; pages 869-970 5. b; pages 869-870 6. d; pages 870-871 Complete the graph FIGURE 34.5 Price (cents per pound) 25 20 15 10 5 Domestic price World price S D 0 10 20 30 40 50 Quantity (millions of pounds per month) 1. a. The world price line is shown in Figure 34.5. 50 million pounds of sugar are consumed in the United States, 10 million pounds are produced in the United States, and 40 million pounds are imported into the United States; pages 868-869. b. The tariff increases the domestic price, as shown in the figure. The quantity consumed in the United States decreases to 40 million pounds, the quantity produced in the United States increases to 20 million pounds, and the amount imported decreases to 20 million pounds; pages 868-869. Short answer and numeric questions 1. The tariff raises the price of steel. U.S. steel consumers decrease the quantity they purchase and U.S. steel producers increase the quantity they produce; pages 868-869. 2. The quota has the same effects as the tariff in the previous question. The quota raises the price of steel. U.S. steel consumers decrease the quantity purchased and U.S. steel producers increase the quantity produced; pages 870-871. 3. Consumers lose from a tariff because the tariff raises the price they pay and the quantity bought decreases. The tariff makes people pay more than the opportunity cost of the good; page 870. CHECKPOINT 34.4 Fill in the blanks The assertion that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets is the infant-industry argument. Dumping occurs when a foreign firm sells its exports at a lower price than its cost of production. Protection is not necessary to bring diversity and stability to our economy. Protection is not necessary to prevent rich countries from exploiting developing countries. The major reason why international trade is restricted is because of rent seeking.
524 Part 11. THE GLOBAL ECONOMY True or false 1. False; page 873 2. False; page 874 3. False; page 875 4. True; page 878 Multiple choice 1. c; page 873 2. c; page 873 3. a; page 874 4. b; page 875 5. a; page 878 6. a; page 878 Short answer and numeric questions 1. Dumping occurs when a foreign firm sells its exports at a lower price than its cost of production. The dumping argument is flawed for the following reasons. First, it is virtually impossible to detect dumping because it is hard to determine a firm s costs and the fair market price. Second, it is hard to think of a good that is produced by a global natural monopoly. Third, if a firm truly was a global natural monopoly, the best way to deal with it would be by regulation; page 874. 2. Saving jobs is one of the oldest arguments in favor of protection. It is also incorrect. Protecting a particular industry will likely save jobs in that industry but will cost many other jobs in other industries. The cost to consumers of saving a job is many times the wage rate of the job saved; page 875. 3. The assertion that trade with developing countries exploits the workers in these countries is incorrect. Wage rates in some developing countries are very low. But by trading with developing countries, we increase the demand for the goods that these countries produce, and we increase the demand for their labor. When the demand for labor in developing countries increases, the wage rate also increases. So instead of exploiting people in developing countries, trade improves their opportunities and increases their income; page 877.